Question

Applet desires a 20% profit on sales of its smart phone. How will you handle this information in breakeven analysis? Assume that unit selling price, unit variable costs and fixed costs are all known.

Answer 1

Decrease the fixed cost

or

Increase the contribution margin by either increasing the selling price or decreasing the variable cost.

Step-by-step explanation:

Assuming The values

Selling Price = $10

Variable cost = $5

Fixed Cost = $100

Contribution = $10 - $5 = $5

Current Break-even = 100 / $5 = 20 units or $200 (20x$10)

Break even analysis formula = Fixed Cost / ( Sales Price per unit - Variable cost per unit )

Desire of 20% profit can be incorporation in Break-even analysis as follows

Desired Profit = $200 x 20% = $40

Reduce the fixed cost by $40

Revised Fixed cost =$100 - $40 = $60

Sales = ( Desired Profit + fixed cost ) / Contribution

20 units = ( $40 + $60 ) / $5

20 units = $100 / $5

20 units = 20 units

Reduce the fixed cost by $40

Increase contribution by $7

There are two options to increase Contribution

Increase in sale price = $12 - $5 = $7

Decrease in Variable cost = $10- $3 = $7

=$100 - $40 = $60

Sales = ( Desired Profit + fixed cost ) / Contribution

20 units = ( $40 + $100 ) / $7

20 units = $140 / $7

20 units = 20 units